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Generalized news reports about the conflicts between stock analysts and investment bankers was not enough to put investors on notice for purposes of filing a claim under securities laws, a federal judge in New York has ruled. Southern District Judge Shira Scheindlin rejected a motion to dismiss lawsuits on statute of limitations grounds made by Lehman Brothers Inc., Goldman Sachs & Co. and Morgan Stanley & Co. in Fogarazzo v. Lehman Brothers Inc., 03 Civ. 5194. Investors in RSL Communications Inc. claimed the investment banks maintained bullish forecasts for RSL even though evidence showed that analysts at the banks were well aware that the prospects for the company were poor. The investors, who bought RSL stock between April 1999 and December 2000, said the analysts’ optimistic reports were driven by the $190 million in business the banks earned by handling the initial public offering of RSL and other business. Analysts also pulled their punches, the investors claimed, because their own compensation depended on investment banking business, and that compensation was reviewed by superiors on the investment side of the business. They also claimed that these conflicts were not disclosed until April 2003, when it was announced that the three banks were part of a massive industry settlement with the Securities and Exchange Commission and attorneys general of states throughout the nation on research conflicts at the banks. Lehman Brothers, Goldman Sachs and Morgan Stanley argued that the statute of limitations barred claims by RSL investors. The reason, they said, was that several media reports had been published as of April 2000 detailing the conflicts — and some media reports discussed the conflicts as early as 1995. They argued that the RSL investors were therefore on notice to inquire into the conflicts and should not have waited until July of last year to bring suit. In support of their argument, the banks cited Southern District Judge Milton Pollack’s decision in In re Merrill Lynch & Co. Inc., Research Reports Securities Litigation, 273 F.Supp. 2d 351. Judge Pollack, dismissing the plaintiff’s case, said that “well before … April 2000, abundant material was in the public domain regarding the existence of widespread investment banking conflicts of interest and allegedly inflated buy ratings in Wall Street stock research.” Judge Scheindlin said the media reports only “speak broadly about conflicts of interest created by the research analyst/investment banker relationship” and “do not disclose the systematic misrepresentations charged in this suit.” “While such reports indicate a tension created by analysts’ placement within firms that derive a large proportion of their revenue from investment banking business, they do not suggest the widespread fraud alleged here — they only provide the background,” she said. “Absent from these reports are allegations that investment bankers were requiring analysts to issue certain recommendations, that analysts’ compensation was derived from the amount of investment banking revenue that they generated, or that the analysts’ views of the securities they covered were the exact opposite of what they recommended to the public. “In Merrill Lynch, the court had media reports that specifically identified Merrill Lynch as suffering from wide-spread conflicts of interest, and which detailed particular statements by Merrill Lynch analysts indicating a massive scheme to defraud. There are no such reports here.” The banks had also asked Scheindlin to dismiss the suits because, in their view, the investors had not alleged a causal connection between the alleged fraud and the subsequent decline in RSL stock. The judge said, “It is true that the Banks did not conceal any facts regarding RSL — they did not withhold information about RSL’s debts or assets or about any important financial events in the life of RSL. … “Nor did they conceal it when RSL earnings came in below estimates. What the Banks did do, however, was manipulate these objective facts by misstating the Banks’ true opinions of the impact of these events on the investment quality of RSL securities,” she said. “Rather than identify these events for what they really were — the first warning signs of the demise of RSL — the Banks instead injected bullish reports into the market suggesting that RSL was being drastically underpriced,” that some of the company’s problems were “aberrations,” and “that this was the perfect time to buy RSL stock because it was cheaper than it ought to have been.” Plaintiff investors are represented by Curtis Trinko, Neal A. DeYoung, Lori E. Colangelo and Jeffrey B. Silverstein of the Law Offices of Curtis Trinko. Lehman Brothers are represented by Moses Silverman, H. Christopher Boehning, Diane G. Know and Anne E. Arreola of Paul, Weiss, Rifkind, Wharton & Garrison. Goldman Sachs is represented by David H. Braff, Stephanie G. Wheeler and David E. Swarts of Sullivan & Cromwell. Morgan Stanley is represented by Alexander Dimitrief, Peter D. Doyle and Katherine J. Alprin of Kirkland & Ellis.

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